Opinion
Docket No. 6514-20S.
04-07-2021
Fawzi Nona, Petitioner v. Commissioner of Internal Revenue, Respondent
ORDER
Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is
ORDERED that the Clerk of the Court shall transmit herewith to petitioner and to respondent a copy of the pages of the transcript of the remote trial in the above case before Special Trial Judge Diana L. Leyden at Detroit, Michigan, on March 17, 2021, containing her oral findings of fact and opinion rendered at the trial session at which the case was heard.
In accordance with the oral findings of fact and opinion, a decision will be entered for respondent.
(Signed) Diana L. Leyden
Special Trial Judge Pages: 1 through 12 Place: Detroit, Michigan (Remote Proceeding) Date: March 17, 2021 Levin U.S. Courthouse
231 W. Lafayette Boulevard
Room 1031, 10th Floor
Detroit, Michigan 48226
(Remote Proceeding) March 17, 2021
The above-entitled matter came on for bench opinion, pursuant to notice at 1:43 p.m.
BEFORE: HONORABLE DIANA L. LEYDEN Special Trial Judge
APPEARANCES:
For the Petitioner:
No Appearance
For the Respondent:
No Appearance
PROCEEDINGS
(1:43 p.m.)
THE CLERK: Calling from the calendar docket number 6514-20S, Fwazi Nona.
(Whereupon, a bench opinion was rendered.) Bench Opinion by Judge Diana L. Leyden March 17, 2021 Fawzi Nona v. Commissioner of Internal Revenue Docket No. 6514-20S
THE COURT: THE COURT HAS DECIDED TO RENDER ORAL FINDINGS OF FACT AND OPINION IN THIS CASE, AND THE FOLLOWING REPRESENTS THE COURT'S ORAL FINDINGS OF FACT AND OPINION. THE ORAL FINDINGS OF FACT AND OPINION SHALL NOT BE RELIED UPON AS PRECEDENT IN ANY OTHER CASE. SEE RULE 152(C), TAX COURT RULES OF PRACTICE AND PROCEDURE.
Hereinafter in this bench opinion, all section references are to the Internal Revenue Code, as amended, and in effect for the relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure.
This proceeding was heard as a Small Tax Case pursuant to the provisions of section 7463 and Rules 170 through 175 of the Tax Court Rules of Practice and Procedure. This bench opinion is made pursuant to the authority granted by section 7459(b) and Rule 152 of the Tax Court Rules of Practice and Procedure.
The Court uses the term "Internal Revenue Service" or "IRS" to refer to administrative actions taken outside of these proceedings. The Court uses the term "respondent" to refer to the Commissioner of Internal Revenue, who is the head of the IRS and is respondent in this case, and to refer to actions taken in connection with this case.
The trial of this case was conducted on March 15, 2021, at the remote Detroit, Michigan, trial session. Petitioner appeared on his own behalf. Irina V. Shulyak appeared on behalf of respondent.
In a notice of deficiency dated February 12, 2020, the IRS determined a deficiency in petitioner's 2018 Federal income tax of $3,042, and a section 6662(a) accuracy-related penalty of $608.40.
Petitioner conceded at trial the disallowance of his Schedule A charitable contribution deduction of $2,500 and the disallowance of his Schedule C rent/lease of other business property deduction of $700. After the concessions by petitioner the issues for decision by the Court are whether for taxable year 2018 petitioner is entitled to:
(1) claim the filing status of "single";
(2) claim deductions for expenses reported on his Schedule A of taxes in the amount of $10,000;
(3) claim Schedule C deductions for:
(a) other expenses of $500;
(b) travel expenses of $600;
(c) taxes and licenses expenses of $200;
(d) supplies expenses of $250;
(e) office expenses of $700;
(f) legal and professional services expenses of $250;
(g) insurance (other than health) expenses of $600;
(h) car and truck expenses of $12,156; and
(i) advertising expenses of $500;
(4) claim a Schedule D loss of $3,000; and whether petitioner is liable for the accuracy-related penalty under section 6662(a) for negligence or disregard of rules or regulations.
Background
Some of the facts are stipulated and are so found. The First Stipulation of Facts and Exhibits 1-J and 2-J were filed on January 19, 2021. Proposed Trial Exhibit 1000-R was filed by respondent on February 26, 2021. The stipulations of facts and exhibits and the proposed trial exhibit were admitted into the record. Petitioner resided in Michigan at the time that the petition was filed with the Court.
Petitioner has a bachelor's degree in accounting, with a minor in finance, and is currently employed as an IRS revenue agent. On his 2018 individual income tax return petitioner claimed single as his filing status, reported $50,250 in wages, and $220 in taxable refunds, and claimed $19,773 on the Schedule A Itemized Deductions attached to his return. Petitioner also filed a Schedule C, Profit and Loss From Business, and reported $0 in income and claimed deductions for various expenses of $16,356. On his 2018 tax return petitioner reported $1,169 in tax due. Petitioner was separated from his spouse but legally married under Michigan law for the entirety of 2018.
The IRS subsequently issued him a notice of deficiency proposing changes and a deficiency. The IRS adjusted petitioner's filing status from single to married filing separately. The IRS disallowed or changed petitioner's claimed deductions on his Schedule A and a changed a loss claimed on a Schedule D. The changed deduction on the Schedule A for taxes and the changed loss on Schedule D are computational adjustments resulting from the change of petitioner's filing status from single to married filing separately. Petitioner timely filed a petition with this Court.
Discussion
Generally, the Commissioner's determination of a deficiency is presumed correct, and the taxpayer bears the burden of proving it incorrect. See Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Moreover, deductions are a matter of legislative grace, and the taxpayer bears the burden of proving entitlement to any deduction claimed. INDOPCO Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).
Under section 7491(a), the burden of proof may shift to the Commissioner if the taxpayer produces credible evidence with respect to any relevant factual issue and meets other requirements. Petitioner has not argued that section 7491(a) applies nor established that its requirements are met. The burden of proof remains with petitioner.
Deductions Subject to Strict Substantiation
Taxpayers are required to maintain records sufficient to substantiate their claimed deductions. See sec. 6001. The taxpayer must substantiate both the amounts paid and the purpose of the claimed deductions. Higbee v. Commissioner, 116 T.C. 438, 440 (2001). Section 274 requires strict substantiation of expenses for travel, meals, and entertainment, and for expenses with respect to any passenger automobile, computer, cellular telephone, and property generally used for entertainment. Sec. 274(d); sec. 280F(d)(4)(A); sec. 1.280F-6T(b)(3), Income Tax Regs.; see Sanford v. Commissioner, 50 T.C. 823, 827 (1968), aff'd, 412 F.2d 201 (2d Cir. 1969). No such deductions are allowed unless the taxpayer substantiates by adequate records or by sufficient evidence corroborating the taxpayer's own statement, which in combination are sufficient to establish the amount, date, time, and business purpose for each expense. Sec. 1.274-5(T)(b)(2), (c)(1), Temporary Income Tax Regs., 50 Fed. Reg. 46014-46016 (Nov. 6, 1985).
When petitioner was questioned as to how he came up with the dollar amounts for his claimed deductions his response was "I guessed." He did not track his expenses and did not provide the Court with any evidence to substantiate his claimed deductions. Petitioner also acknowledged that these expenses he claimed as deductions under Schedule C were in fact expenses he incurred as an employee and should have been claimed on Schedule A. Either way petitioner did not substantiate any of his claimed deductions and thus, the Court sustains respondent's proposed disallowance of these expenses.
Filing Status
Petitioner was legally married as of December 31, 2018. He was divorced from his spouse sometime after that. Therefore for 2018 petitioner may not elect the "single" filing status. See sec. 2. The Court sustains respondent's change of petitioner's filing status to married filing separately and the derivative reduction to the amount of taxes claimed as a deduction on the Schedule A from $10,000 to $5,000, and the amount of loss claimed on Schedule D from $3,000 to $1,500.
Section 6662(a) Accuracy-Related Penalty
Respondent determined petitioner was liable for the accuracy-related penalty under section 6662(a) for 2018 because petitioner's underpayment was due to negligence or disregard of the rules or regulations. See Sec. 6662(a), (b)(1) & (c). Section 6662(a) authorizes the imposition of a twenty percent penalty on the portion of an underpayment of tax that is attributable to, among other things, negligence. Id. An underpayment is defined generally as the difference between the tax imposed on the taxpayer and the tax reported on the tax return. Sec. 6664(a). Negligence "includes any failure to make a reasonable attempt to comply" with the provisions of the code section and disregard "includes any careless, reckless, or intentional disregard." Sec. 6662(c). More specifically, negligence includes any failure by the taxpayer to keep adequate books and records or to substantiate items properly. See sec. 1.6662-3(b)(1), Income Tax Regs.
Under section 7491(c) the Commissioner bears the burden of production with regard to penalties. See Higbee v. Commissioner, 116 T.C. 438, 446 (2001). To meet that burden the Commissioner must produce sufficient evidence to show that it is appropriate to impose the penalty. See id. Respondent has shown that petitioner failed to keep adequate books and records or to substantiate properly the items in question. Guessing amounts to claim as deductions further indicates that petitioner disregarded the rules of keeping books and records necessary to support his claimed deductions. Respondent has met his burden of production with respect to the imposition of the accuracy-related penalty under section 6662(a). See sec. 1.6662-3(b), Income Tax Regs.
Respondent has also presented evidence that the section 6662(a) penalty was "personally approved (in writing) by the immediate supervisor of the individual making such determination" with a Civil Penalty Approval Form signed by the immediate supervisor of the IRS employee who made the initial penalty determination in this case. See sec. 6751(b)(1). Consequently, the Court concludes that respondent has met his burden of production for his determination that petitioner is liable for the accuracy-related penalty based on negligence or disregard of rules or regulations.
Petitioner did not offer a defense to the imposition of the accuracy-related penalty in this case -- namely petitioner did not assert that he had reasonable cause for disregarding the rules or being negligent in claiming the deductions and the filing status of single. The Court sustains respondent's determination that petitioner is liable for an accuracy-related penalty under section 6662(a).
In order to give effect to our disposition of the disputed issues, decision will be entered for respondent.
THIS CONCLUDES THE COURT'S ORAL FINDINGS OF FACT AND OPINION IN THIS CASE.
(Whereupon, at 1:55 p.m., the above-entitled matter was concluded.)
CERTIFICATE OF TRANSCRIBER AND PROOFREADER
CASE NAME: Fawzi Nona v. Commissioner DOCKET NO.: 6514-20S
We, the undersigned, do hereby certify that the foregoing pages, numbers 1 through 12 inclusive, are the true, accurate and complete transcript prepared from the verbal recording made by electronic recording by Adrian Morris on March 17, 2021 before the United States Tax Court at its remote session in Detroit, MI, in accordance with the applicable provisions of the current verbatim reporting contract of the Court and have verified the accuracy of the transcript by comparing the typewritten transcript against the verbal recording.
/s/_________
Meribeth Ashley, CET-507
Transcriber
__________
3/23/21
Date
/s/_________
Lori Rahtes, CDLT-108
Proofreader
__________
3/23/21
Date